Berta Industries stock has a beta of 1.20. The company just paid a dividend of $

Question

Berta Industries stock has a beta of 1.20. The company just paid a dividend of $0.50, and the dividends are expected to grow at 6 percent. The expected return on the market is 11 percent, and Treasury bills are yielding 5.6 percent. The most recent stock price for Berta is $73.

Calculate the cost of equity using the DCF method. (Round your answer to 2 decimal places. (e.g., 32.16))

Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16))

Berta Industries stock has a beta of 1.20. The company just paid a dividend of $0.50, and the dividends are expected to grow at 6 percent. The expected return on the market is 11 percent, and Treasury bills are yielding 5.6 percent. The most recent stock price for Berta is $73.

Explanation / Answer

a)Cost of equity = D0(1+g)/current price     +g

                               = .50(1+.06) / 73   + .06

                                = .53 / 73 + .06

                                = .00726 + .06

                               = .0673 or 6.73%

b)Cost of equity = Rf + [Beta * (Rm-Rf)

                              = 5.6 + [1.20 (11-5.6)]

                              = 5.6 + [1.20* 5.4]

                            = 5.60 + 6.48

                             = 12.08%

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